1. Negotiation Analytics 30C02000 Jyrki Wallenius
Lecture 2: Fundamentals: Game Theory and Seven Elements
Original lecture slides: Pirkko Lahdelma

2. Game theory
How rational actors ought to behave when their separate choices interact to produce payoffs to each player
Players make their decisions independently of each other
Bad news:
Knowing game theory does not guarantee winning
Good news:
Framework for thinking about strategic interaction

3. The strategic essence of interactive thinking (game theory)
You have to act
Your payoff depends both on what you do and what other players do
You do not know what they will do – but you know what they could do
They do not know what you will do
Simultaneous choices
No pre-play discussion
p. 54

4. Payoffs associated with
The 2 x 2 matrix display
COLUMN PLAYER
C1 (LEFT)
C2 (RIGHT)
ROW PLAYER R1
(UP)
Payoffs associated with
(UP, LEFT)
(UP, RIGHT)
R2 (DOWN)
(DOWN, LEFT)
(DOWN, RIGHT)
Pp. 54 – 72

5. Two-by-two matrix games from simple to complex cases
Indeterminacy
Dominance
Equilibrium
Commitment and the advantage in going first
Threats and communication
Doomed by rationality
Prisoner’s dilemma
The iterated dilemma game and tacit collusion
The ultimatum game (take it or leave it)

6. Indeterminacy: play PRS!
COLUMN PLAYER
C1 (LEFT)
C2 (RIGHT)
ROW PLAYER R1
(UP) 4 5 10 -6
R2 (DOWN) 12 7 9

7. Dominance 4 3 12 8 5 COLUMN PLAYER C1 (LEFT) C2 (RIGHT) ROW PLAYER R1
(UP) 4 3
R2 (DOWN) 12 8 5

8. Equilibrium (Play this game! No pre-play talk!)
COLUMN PLAYER
C1 (LEFT)
C2 (RIGHT)
ROW PLAYER R1
(UP) 4 3 10 6
R2 (DOWN) 12 8 5
Multiple rounds
No incentive to move, if the other one stays put.
This is called equilibrium. Core concept.
If the players could talk. They would select lower left corner

9. Advantage in going first: relaxing the assumption of simultaneous moves
COLUMN PLAYER
C1 (LEFT)
C2 (RIGHT)
ROW PLAYER R1
(UP) 1 2
R2 (DOWN)

10. Threats and communication (allow communication) – up and left dominates
COLUMN PLAYER
C1 (LEFT)
C2 (RIGHT)
ROW PLAYER R1
(UP) 1 5 4
R2 (DOWN)
-10
-20
Negotiation
What could happen
Column column would like to take left.
If communication is allowed row player may force Column player to take right by threat of non dominating strategy.

11. Doomed by rationality 5 -5 10 -2 COLUMN PLAYER C1 (LEFT) C2 (RIGHT)
ROW PLAYER R1
(UP) 5 -5 10
R2 (DOWN) -2

12. The prisoner’s dilemma (play the game!)
COLUMN PLAYER
NOT CONFESS
CONFESS
ROW PLAYER
1 year
5 years
0 years
3 years
Social trap.

13. Iterated dilemma game and tacit collusion
COLUMN PLAYER
COOPERATE
DEFECT
ROW PLAYER 5 -5 10 -2

14. Ultimatum Game – no pre-play communication, game played just once
Two players are given 100 euros to share. One of the persons is the allocator, the other the recipient. The allocator decides how much to give to the recipient. If the recipient accepts, that’s it. However, if the recipient does not accept, both get zero. Who would accept less than 50 as recipient? Less than 25? Average in experiments? How were the roles (allocator, recipient) chosen?

15. Seven Elements of Negotiation by Roger Fisher and William Ury Appendix

16. 1. Relationship Negotiation is always interactive You should
Increase mutual understanding
Build trust and respect
Try to keep reason and emotion in balance
Separate people issues from substantive issues
Some questions on relationship when preparing for a negotiation:
Are you likely to be defensive or antagonistic with this person?
Could this negotiation damage your relationship?
Might it be difficult for you to talk about money with them?
Is this someone with whom you will need to work in the future?

17. 2. Communication Good two-way communication is needed You should
Question your assumptions and identify things to listen for
Keep in mind that communication is more than just verbal
Acknowledge emotions
Some questions on communication when preparing for a negotiation:
Do you know what you want to listen for?
Are you ready to listen actively and empathetically to whatever they say?
Are the messages you want to deliver clear?
Have you thought about how to speak in ways that will make them want to listen?

18. 3. BATNA - Best Alternative To Negotiated Agreement
Poor analysis leads to poor agreements
You should
Think of your alternatives to a negotiated agreement
Select and improve your BATNA
Identify alternatives open to the other side
Estimate also their BATNA
Some questions on alternatives when preparing for a negotiation:
What will you do if you do not agree?
Do you know what they will do if they don't agree?
Do you feel you must reach agreement? Do you assume they have to?
Do you feel that they are more powerful? Or that you are more powerful?

19. 4. Interests Needs, desires, and fears that drive negotiations
You should
Focus on interests, not positions! (Example: quarrel about how much the window should be open)
Identify the relevant parties and clarify their interests – both personal and group/subgroup interests; open and hidden
Prioritize your interests
Remember that negotiators are people with personal interests always involved
The more we have thought about our interests in advance, the more likely we are to meet them
Questions on interests when preparing for a negotiation:
Are you likely to be quarreling about your positions?
Why do you want what you want?
Have you prioritized the issues that are important to you?
Are you confused about "where they are coming from"?
Have you considered what you would want if you were in their shoes?

20. 5. Options Some questions on options when preparing for a negotiation:
You should
Create options to meet your and their interests
Find ways to maximize joint gains
Find value in differences; sources of difference can be e.g. risk, timing, perceptions, or marginal value of the same item
Look at the issue from multiple sides
Separate options creation and decision making
Some questions on options when preparing for a negotiation:
Does the situation look as though someone must win, the other lose?
Is this a business or family situation where you both have things to gain?
Is it possible that your interests are compatible?
Have you never engaged in joint brainstorming of possibilities?
Have you reached a stalemate?

21. Four basic steps in inventing options
Step 3: Approaches
Step 4: Action ideas
Step 1: Problem
Step 2: Analysis
Sort symptoms into categories
Suggest causes
Observe what is lacking
Note barriers to resolving the problem
What are possible strategies or prescriptions?
What are some theoretical cures?
Generate broad ideas about what might be done
What’s wrong?
What are current symptoms?
What might be done?
What specific steps might be taken to deal with the problems?

22. 6. Legitimacy - agreed (objective) criteria
Effective negotiators persuade their counterparts
Verifiable external standards
to persuade others that they are being treated fairly
as a shield to protect us from being ripped off
You should
Agree on criteria before choosing an option if possible
Use the fairness of the process to persuade
Offer them an attractive way to explain their decision
Some questions on legitimacy when preparing for a negotiation:
Are you concerned that you may get ripped off? Are you treated unfairly?
Would it help to give them convincing arguments as to why your proposal is fair for them?
Will you have to explain to others why you agreed to whatever it is you agree on? Will they?
Are there critics who are likely to go after one or both of you?
Rip off –steal ideas

23. 7. Commitment
The key question is “why the negotiators should do what they promised?”
You should
Pay attention to the choice of words
Plan the implementation mechanisms
Build both positive and negative sanctions
Use legal instruments
Follow-up
Create incentives
Identify the issues to be included in the agreement
Plan the steps to agreement
Some questions on commitment when preparing for a negotiation:
Are you approaching the time to make a decision? .
Is there more to do, after you both say "yes"?
Are you clear on who has authority to make the commitments?